* Tucker: securities lending is not risk free
* International action expected on securities lending
* "Dismay" at cost of complying with EU capital rules
* Checks loom on capital to underpin with profits policies
By Huw Jones
LONDON, March 13 A trade repository for recording transactions would shine a light on the "invisibility" of insurers who lend out shares for a fee, Bank of England Deputy Governor for Financial Stability Paul Tucker said on Tuesday.
The BoE becomes the main regulator for insurers like Aviva , Prudential, Legal & General and RSA from next year when the Financial Services Authority is scrapped as part of a shake up of UK financial supervision.
Tucker said there was a potential for insurance firms to build risky in-house "shadow banks" - a reference to opaque entities that handle credit - through their securities lending business.
Insurers earn cash by lending shares to financial institutions like market makers which is "essential for any capital market to work efficiently", Tucker said.
There are risks, however, he added.
"All it takes is to lend out securities for cash, and for the cash to be lent or invested in higher-yielding assets," Tucker said.
The FSA has already issued guidance on containing risks in these "liquidity swaps" but Tucker said this won't be enough.
"Internationally, the authorities are going to have to go further, putting some structure around these markets," Tucker told a group of insurance industry top officials.
"One issue is transparency. Maybe we should at least contemplate introducing a trade repository. If we are moving towards greater transparency in derivative markets, why not do so in a core financing market," Tucker said.
A trade repository records transactions for supervisors to check who owns what if things go wrong. Several repositories have already been set up for off-exchange derivatives traded by banks.
Insurers have argued they should not be tarred by the same regulatory brush as banks as they were not at the heart of the financial crisis.
The sector is fighting potential new capital surcharges on the world's biggest insurers to make them safer, but Tucker said insurers' "flirtations" with the wider capital market needed watching.
Tucker warned insurers they may need to hold more capital to cover potential pay outs on their "with profits" policies because the product terms were "incompletely pinned down".
"A legacy stock of policies exists, so there is no ducking the issue," Tucker said.
Supervisors will assess whether insurers are adequately capitalised after taking into account a range of returns policyholders might expect, he added.
Millions of UK consumers took out with-profits policies to protect themselves from volatile markets but performance has disappointed, with bonus rates and payouts cut. Many of the with-profit funds have been closed to new business.
Tucker also said the BoE was "dismayed" by the costs insurers face to comply with planned European Union insurance capital rules, known as Solvency II, from 2014.
"We are also concerned that ... it risks being too complicated in its desire to introduce a 'risk sensitive' regime," Tucker said.